News and commentary on the latest securities developments.
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Friday, August 24, 2012

SEC’s Whistleblower Rewards Program – Who are the Real Bounty Hunters?

The U.S. Securities and Exchange Commission (“SEC”) made its
first payout of $50,000 to a whistleblower since a program was
created last year to reward people who provide regulators with
evidence of securities fraud.

The SEC set up a whistleblower program in August 2011 to reward
individuals who provide evidence of securities law violations which
lead to SEC sanctions of more than $1 million. The program was
authorized in the 2010 financial-regulation overhaul. Potential
awards could range from 10 percent to 30 percent of the money
collected.

The unnamed whistleblower helped the SEC bring an enforcement
action that resulted in more than $1 million in sanctions. The
SEC rewarded the anonymous whistleblower 30% of the recovery.
So far the SEC has only collected $150,000 but as more of the
sanctions are recovered, the whistleblower’s reward will increase.
The SEC believes the announcement of its first reward payout will
give the program a boost. However a second person in the same
matter was denied a whistleblower reward because the information
provided by the person did not lead to or significantly contribute to
the enforcement action.

While the program is supposed to encourage individuals to come
forward with information relating to securities fraud, Peter Sivere,
a former compliance officer at JPMorgan Chase had a much different
experience with his efforts to “do the right thing.” To be
clear, the story of Peter Sivere occurred from 2003 to 2005 before
the whistleblower program was adopted by the SEC.

During an SEC investigation of whether a New Jersey hedge fund, a
big client of JPMorgan, was late trading mutual funds, Sivere was
allegedly terminated from JPMorgan for turning over emails to the SEC
and expressing concerns that JPMorgan was not fully cooperating with
the investigation. The emails indicated that JPMorgan had
provided a $105 million line of credit to the hedge fund that it used
to facilitate its late trading in mutual funds. Late trading
occurs when one buys shares at the day’s final price even though
the market has closed.

Before his termination, Sivere contacted SEC lawyer George Demos
by email seeking to become a whistleblower and inquiring whether he
would be able to collect a reward for his information. Even
though Demos informed him that a “bounty” would not be available,
Sivere turned the emails over to the SEC anyways. Sivere was
later fired and JPMorgan reported on his U-5 that he was terminated
for “accessing e-mails without authorization.” JPMorgan
later agreed in a settlement to amend his U-5 to state his employment
ended as a result of a “disagreement regarding the scope of
[Sivere’s] authority.”

Sivere reported the alleged retaliation to the Occupational Safety
and Health Administration (“OSHA”) and it was discovered during
their investigation that Demos informed JPMorgan’s lawyers
that Sivere had asked the SEC for a whistleblower bounty and Demos
even encouraged JPMorgan to use this information in the lawsuit
between Sivere and JPMorgan. While Demos’ behavior violates
SEC protocol, and the allegations were confirmed by the SEC’s
inspector general, no disciplinary action was taken against Demos.
In fact, Demos held his position with the SEC until 2009.

More recently, a whistleblower’s identity was inadvertently
revealed during an SEC investigation of Pipeline Trading Systems, LLC
when an SEC lawyer shared the whistleblower's notebook with one of
Pipeline’s executives. The executive recognized the
whistleblower's handwriting. The whistleblower, Peter Earle, was
a former employee of one of Pipeline’s trading affiliates and
expressed his disappointment in the SEC’s failed efforts to keep
his identify private.

The new whistleblower rewards program is supposed to guarantee
anonymity, yet the SEC has scars from the past which might be counter
intuitive for the program, especially since no action was taken
against Demos for the confidentiality violation.

If you think you have information that may lead to a recovery
under the whistleblower program, contact the attorneys at Cosgrove
Law Group, LLC to have your rights represented and your identity
protected.

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